Seniors in or nearing retirement face a dilemma: Most have failed to save enough for a secure retirement. Moreover, since the baby boom generation (born after 1946) entered their retirement years, 10,000 to 12,000 are retiring every day. This trend is predicted to continue through 2030. Retirement experts are calling this an individual and a national emergency.
Understandably, great numbers of seniors and their advisors are exploring ways to extend savings by using home equity wealth in combination with financial wealth to meet current and future needs. Further, the great majority of seniors state strong preferences to remain in their homes and age in place. So, short of selling the home, the options are limited with most opting to borrow through a traditional HELOC or a reverse mortgage.
Industry records reveal HELOCs are selected over HECMs 9 out of 10 times. Why? The answers are not surprising considering what most know (or think they know) and don’t know about reverse mortgages:
Lack of knowledge Homeowners, especially seniors, are familiar with and understand traditional (forward) mortgages. HELOCs offer a low- or no-cost option that provides ready access to funds that are easy to obtain and require minimum interest-only monthly payments. HECMs, on the other hand, are not well understood and are generally viewed in a negative or questionable light as being more expensive, complicated, difficult to get and promoted by self-serving lenders.
Misconceptions and myths Misunderstandings of reverse mortgages are prevalent and, unfortunately, discourage examination. Common misconceptions include: the lender takes ownership of the house; nothing will be left for the kids; and the loan should only be used as a last resort. These and others have deterred many from learning more.
Uninformed advisors Seniors generally have experienced long and comfortable relationships with their bank and other advisors, and typically look to them first for advice and recommendations. Most banks aggressively promote their in-house HELOC program, don’t offer HECMs, and are not well versed on their attributes or suitability for seniors. Friends and other advisors are just as uninformed about reverse mortgages and default to recommending a HELOC, which they are more familiar with.
An Important Decision Making the right choice between a HELOC and a HECM is more important than most realize. The right decision requires thoughtful considerations of individual needs and circumstances as well as near- and longer-term objectives. Too frequently, conclusions are reached without adequate information, or through advice from those who may not be qualified or have pure motivations.
Both programs have their place and, like most things in life, have pros and cons, costs and responsibilities. Determining the best fit can be done based on a careful evaluation of each loan’s suitability for a particular individual.
Conclusion The new realization that financial and retirement planning protocols must change and include home equity wealth is a major development in addressing the retirement security dilemma. Accomplishing this, however, challenges the traditional, old-school thinking of both seniors and advisors. For many, change is hard, but it will come as the need is real and the consequences compelling.
The HECM is a unique design that was developed specifically to meet this challenge. However, it is but one solution to consider among many, including the sale of the home to downsize or relocate. When refinancing is the choice, 9 out of 10 seniors today choose HELOCs. Considering the factors discussed on the next page, have they made the right decision? I doubt many really understood the differences and what it would mean to them in the near and longer term.